I Don’t Know if I Would Ever Price a Used Car at $14,995 Again

August 5, 2011

Here’s a really important lesson for all on-line advertisers.  This was written by Jasen Rice, one of our most awesome performance managers.

While working with one of my clients covering a strategy on changing the price of a vehicle he had priced at $15,298, my first reaction was to tell him to reduce it down to $14,995 so he wouldn’t miss any searches done up to $15,000 because of $298. Then it dawned on me, don’t change it to $14,995 that might not work either. After the conversation, I came across a strategy that has changed the way I tell my dealers how to price some of their cars. It made me research all pricing strategies and how this type of pricing started in the car business.

Pricing a vehicle at $19,995, $14,998, or $9,997 is a strategy that marketing experts call a Psychological Pricing strategy.

How it Works
“A psychological pricing strategy works by selecting prices to which consumers will have an emotional reaction. For example, a car might be priced at $14,995 rather than at $15,000. A completely rational consumer would recognize that a price difference of $5 is negligible on a big ticket item such as a car. In reality however, consumers do not tend to behave in such a rational manner, but will tend to act emotionally and round down prices.  Although the price of the car is closer to $15,000, many consumers will tend to think of it in the $14,000 range.” (1)

We do this so when the consumer sees our ad, $14,995 looks smaller than $15,000 but that is if and only IF they actually see your ad. This strategy goes way back over a hundred years and it is an effective strategy for traditional advertising. I would say though, for a lot of used cars on your lot, this is NOT the strategy I would carry over to today’s market.

When you think about it, we have changed almost every aspect of used car management because of the Internet, every aspect except Psychological Pricing.  Not changing from this pricing strategy is costing your vehicles search results (SRP’s) on sites like Autotrader/Edmunds.com, Craigslist, KBB.com, some dealerships websites and a lot of certified websites. It is also causing your vehicle to not get the vehicle detail page views (VDP’s) it deserves because we are positioning them into pricing buckets that makes them less appealing.

Let’s say you take a sedan from a price of $15,495 to a price of $14,995 in order to get it more exposure online and to help move the car off your lot. But all you might have done is just moved that car from one price bucket into another price bucket and not increase its search results at all. For instance, if you have 500 customers shopping for a sedan in a price band of $12,000 to $15,000 and you have 500 customers shopping for a sedan between $15,000 to $18,000 all you did is move the sedan from one price bucket to the other, broke even in search results and didn’t get any more exposure on the car.

You need to get away from Psychological Pricing and price your sedan at $15,000! By pricing it at $15,000 you will double the opportunity for your vehicle to show up in searches.  By staying with the traditional pricing of $14,995, you will miss the opportunity of any search done $15,000 and up because of $5. Let’s face it, Craigslist is not the easiest site to shop for a vehicle. If you have ever shopped on Craigslist before, searching by price is the most effective way to stay in your budget, unless you know the exact model car you’re looking for. And if you price yours at $14,995 instead of $15,000, you are missing a lot of activity on that site.

Rounding up or down to the next common price band is what I call a Flat Based Pricing strategy. The most common bands are $5,000, $10,000, $15,000, $20,000, $25,000 continuing on in $5,000 increments. But there are also a lot of searches with $8,000, $12,000, $18,000 and pretty much any thousand dollar range under $10,000. I am not saying to take an $11,235 priced car and move it all the way down to $10,000 or to increase its price up to $12,000 just to get it in a common price band, but if it is due for a price change, I would move it to $11,000. All of this also depends on other aspects like market day’s supply, age, % of market or ranking and other factors, so keep that in mind when you are pricing a vehicle.

Psychological Pricing could also be costing you vehicle detail page views (VDP’s) and here is why.  Let’s go back to the customer shopping for a sedan between $12K and $15K. Most customers shopping between $12K-$15K have a budget closer to $12K but will look up to $15K, so pricing your vehicle at the traditional $14,995 will position this vehicle at the top of their budget and less appealing than the cars closer to $12K. Now, pricing it at a flat $15K will also get that car into a price search of $15K-$18K and if their budget is closer to $15K than to $18K, your car is the lowest priced car in this pricing bucket, making it more appealing and producing more VDP’s.

There are many other advantages to pricing your vehicles at a Flat Based Pricing and I will cover them in later articles. At vAuto, we know the more VDP’s your inventory gets, the more cars you will sell. Here are a couple of quotes that I have received from some of my dealerships over the last month since applying Flat Based Pricing:
“Jasen, I just thought you would want to know what your suggestion did for our internet department. I can’t thank you enough!  2008 Toyota Tundra listed at $18,477. After 7 days this month it had 1025 impressions and 14 clicks at a rate of 1.4%.  After changing the price to an even $18,000, in only 11 days it had 3430 impressions and 79 clicks at a rate of 2.3%

 “2007 BMW X5 listed at $30,524 after 7 days this month it had 833 impressions and 7 clicks at a rate of 0.8%.  After changing the price to an even $30,000, in only 11 days it had 4218 impressions and 49 clicks at a rate of 1.2%

“Here are two examples that I thought you would enjoy for the flat based pricing.”
2003 Dodge Durango 357 days old, changed the price to $6,000 dollars on 7-24-11
Sold 7-28-11 for $6,000 dollars in 4 days.

2000 Ford Ranger, 59 Days in inventory, original price $7,499, 06-1-2011 no action.   Raised price to $8,000 07-22-2011, sold 07-27-2011 for $8,000”

(1) What Is a Psychological Pricing Strategy?  By Wendel Clark, eHow Contributor updated June 30, 2011